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TMI Blog2003 (8) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... ding Co. (P.) Ltd. v. CIT [ 1971 (1) TMI 11 - SUPREME COURT] squarely applies to the facts of the assessee';s case. If the impugned dividend income is brought to tax by applying the decision of the Apex Court, the entire income of the assessee would be income from business and there would be no income at all under the heads, Interest on securities, Income from house property, Capital gains and Income from other sources . In this view of the matter, the gross total income of the assessee will consist of only business income and the assessee's case will fall within the Explanation to section 73 and not in the excluded category thereof. It would thus appear that the definition of Investment Company is similar to Companies which fall into excluded category under Explanation to section 73. In that case, gross total income of the assessee was ₹ 19,66,798 out of which, ₹ 10,67,474 happens to form the income from House property, Other sources and Capital gains. The Assessing Officer held the company to be an investment company within the meaning of section 109(ii) of the Act. On the basis of that, the income from the aforesaid source was more than 50% of its gross total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king out the expenses on earning dividend income has been upheld and as such ought to have upheld the disallowance of expenses of ₹ 1,65,097 which is just and reasonable. 3. The learned representatives of the parties have been heard, their arguments considered and records perused. 4. The assessee is a Private Limited Company engaged in the business of purchase and sale of shares. The assessee filed its return for the assessment year 1990-91, declaring loss of ₹ 43,35,281 on 27-12-1990. The Assessing Officer computed the total income of the assessee in his order dated 20-7-1992 at ₹ 3,56,220. He started the computation of total income from net loss as per profit and loss account and added ₹ 25,07,739 on the ground that the assessee had not shown interest of ₹ 23,26,224 etc. though accrued as books are kept on mercantile basis. Since the assessee had not charged interest on advances to two concerns, though it had paid interest on this borrowings, the Assessing Officer disallowed ₹ 10,73,837 out of interest and added it to the income of the assessee. He also disallowed ₹ 3,48,485 being management fee paid by the assessee on the ground that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer determined the gross total income of the assessee at ₹ 6,42,900 being the income from dividend and as per the Explanation to section 73, section 73 is not applicable where the gross total income of the company consists mainly of income from interest on securities, income from house property, capital gains and income from other sources . Since the income of the assessee was only income from other sources, the provisions of section 73 is not applicable. Therefore, the loss incurred should be treated as business loss and should be set off against dividend income and the balance should be carried forward as business loss. 6. The CIT(A) considered the submissions of the assessee. He rejected the assessee';s contention that its loss cannot be treated to have been incurred from share trading since it had not sold any shares during the previous year. According to the CIT(A), merely because there was no sale of shares during the previous year, it cannot be said that the business of the company was not purchase and sale of shares. The CIT(A), however, agreed with the contention of the assessee that since the gross total income of the assessee consists of only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sale of shares of companies and not of a company. In the case of the assessee, there is purchase of shares of a company, namely, Reliance Industries Limited and there is no sale of shares at all in the year of account. Relying on the decision in Laxmi Feeds ; Exports Ltd. v. Asstt. CIT (1997) 62 ITD 315(Mum.). He argued that plurality of transaction and plurality of companies is a pre-condition for attracting the provisions of Explanation to section 73. This precondition, he submitted, is not satisfied in the case of the assessee, as there is purchase of shares of a single company and there is no sale of shares at all in the year of account. The learned Counsel for the assessee further submitted that an investment company is outside the mischief of the Explanation to section 73. The deeming provisions of the explanation to section 73 are inapplicable to an investment company. For the purposes of the said explanation, Investment Company means a company whose gross total income consists mainly of income from interest on securities, house property, capital gains and income from other sources. Relying on the decision in CIT v. Amritlal ; Co. Ltd. (1995) 212 ITR 540 (Bom.), the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the Director';s Report, which forms part of the annual accounts of the company for the year ended 31-3-1990, it is obvious that during the previous year relevant to the assessment year under consideration, the assessee company dealt in shares and securities, which fact is also corroborated by Para 3 of Schedule ';O'; of the aforesaid annual accounts, wherein, it is stated that since the company is dealing in shares, the same has been treated as stock-in-trade. It is also stated in the Director';s Report (Page 3 of the Paper Book) that the company incurred loss of ₹ 55.97 lakhs, hence, the dividend is not recommended. Balance Sheet as at 31-3-1990 (copy at page 8 of the Paper Book)shows that the company was started with share capital of ₹ 8,000 which increased to ₹ 10,000 in the year of account. The company obtained secured loans from Infrastructure Leasing and Finance Services Ltd., against pledge of shares of ₹ 400 lakhs in the preceding year, which has increased to ₹ 495 lakhs in the year of account. Last year, no fund was utilised towards investment whereas an amount of ₹ 15,000 has been shown as investment towards purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares, have attained finality. 13. The effect of the above findings of the CIT(A) which has become final is that the loss incurred by the assessee is from the assessee';s business of purchase and sale of shares. In this view of the matter, reliance by the learned Counsel for the assessee on the decision of Laxmi Feeds ; Exports Ltd. (supra) is misplaced. In CIT v. Sun Distributors ; Mining Co. Ltd. (1993) 68 Taxman 223, their Lordships of Hon';ble Calcutta High Court held that it is not a requirement of section 73 that both purchase and sale of shares should take place in the same year. What is required to attract section 73 is that the business of the assessee should consist of purchase and sale of shares. Their Lordships observed as under :- Section 73 will apply where any part of the business of the company consists in the purchase and sale of shares of other companies. Therefore, it has to be seen whether the assessee has such a business. It might be that in a particular year shares were only sold or in a particular year the shares were only purchased. The second does not require that both sale and purchase should take place in the same year. What is to be seen is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in Sun Distributors ; Mining Co. Ltd.';s case (supra), the case of the assessee is caught within the mischief of Explanation to section 73. This will not be so, if gross total income of the assessee company consists mainly of income which is chargeable under the heads, Interest on Securities, Income from house property, Capital gains and Income from other sources . We may call it as excluded category . The finding of the CIT(A) in this regard is that since the gross total income of the assessee consists of only income from other sources, the provisions of section 73 is not applicable in its case and therefore, the loss incurred is to be treated as business loss. It is this finding, which has been challenged by the revenue. 16. From the facts of the assessee';s case enumerated earlier, it may be noted that the dividend income earned by the assessee is attributable to the equity shares of Reliance Industries Ltd., held by the assessee as stock-in-trade in its business of purchase and sale of shares. In other words, the dividend received by the assessee is not attributable to investments by the assessee in shares. 17. On these facts, can it be said that the dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation to section 73. In that case, gross total income of the assessee was ₹ 19,66,798 out of which, ₹ 10,67,474 happens to form the income from House property, Other sources and Capital gains. The Assessing Officer held the company to be an ';investment company'; within the meaning of section 109(ii) of the Act. On the basis of that, the income from the aforesaid source was more than 50% of its gross total income. On appeal, the CIT(A) and the Tribunal did not agree with the finding of the Assessing Officer. The revenue filed reference before the Hon';ble High Court and the High Court laid down the test which is to be applied for determining whether a company can be termed as investment company or not. At page 545 of the report, their Lordships observed thus :- From the definition of investment company set out above, it is evident that a company can be held to be an investment company only if its gross total income consists mainly of income which is chargeable under the heads specified therein. It is not the actual income arising in a particular year under those heads vis-a-vis income falling under other heads that is determinative of the real character ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or industrial activities cannot be held to be an investment company merely because in particular year, its income from such business or industrial activity is insignificant or a negative figure. It is an undisputed fact that the assessee before us is engaged mainly, which word is akin to wholly in the business of purchase and sale of shares. If that be so, in our opinion, the decision (supra) of the Hon';ble Jurisdictional High Court would not render any assistance to the assessee and the assessee';s case would not fall within the excluded category of Explanation to section 73. In other words, the case of the assessee, in our considered opinion, falls within the ambit of the Explanation to section 73. 23. In Eastern Aviation ; Industries Ltd.';s case (supra), relied upon by the learned D.R. in the context of computation of income for purposes of finding out if the assessee is an investment company, their Lordships observed that the words income or profits and gains should be understood as including the loss also. So that in one sense, profits and gains represent positive income , whereas Loss represent negative profit . Both positive and negative profits are of revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its share trading transactions inclusive of interest paid on borrowed monies attributable to that business was rightly treated by theTribunal as a loss in speculative business. 24. The conclusion which emerges from the discussion above is that the loss from trading in shares has to be treated as speculation loss. In this view of the matter, we reverse the findings of the CIT(A) on the point and allow ground No. 1 of the revenue. 25. Apropos ground No. 2 above. The Assessing Officer apportioned the total expenses including the interest, in the ratio of dividend income and arrived at expenses of ₹ 1,65,097, as against expenditure of ₹ 200 claimed by the assessee, which according to him would have been incurred for earning dividend income of ₹ 6,42,900, for the purposes of deduction under section 80M. 26. On appeal, it was contended that the interest was paid for money borrowed for purposes of business and was fully allowable under section 36(1)(iii) and was not possible to allocate a portion of that interest as against income from dividend. Reliance was placed on the decision in CIT v. Cotton Fabrics Ltd. (1981) 131 ITR 99(Guj.) and in the case of CIT v. Enemour I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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